Cintas Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended February 28, 2018. Although the request identifies “2017 Q3,” the filing is Cintas’s fiscal 2018 third-quarter report, filed April 6, 2018. Results are unaudited. Cintas provides uniform rental, facility, first aid and safety, fire protection, and related services, primarily in North America.
Financial performance and liquidity
| Metric | Three months ended Feb. 28, 2018 | Year-over-year change | Nine months ended Feb. 28, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1,589.1 million | +26.6% | $4,807.1 million | +26.7% |
| Operating income | $200.0 million | +4.2% | $684.3 million | +14.8% |
| Operating margin | 12.6% | Down from 15.3% | 14.2% | Down from 15.7% |
| Income from continuing operations | $295.8 million | +152.9% | $594.6 million | +58.5% |
| Net income | $302.1 million | +156.0% | $656.4 million | +65.6% |
| Diluted EPS from continuing operations | $2.66 | +150.9% | $5.35 | +56.4% |
| Net cash from operating activities | Not separately provided for the quarter | — | $660.9 million | +$177.1 million |
Revenue growth included organic growth of 7.8% in the quarter and 7.9% for the nine-month period, with acquisitions contributing approximately 18.5% and 18.6%, respectively, primarily from the G&K Services acquisition. Foreign exchange contributed 0.3% and 0.2%, respectively.
- Segment performance: Uniform Rental and Facility Services revenue increased 30.0% in the quarter and 30.9% year to date. First Aid and Safety Services revenue increased 10.5% and 11.5%, respectively.
- Margins: Uniform Rental and Facility Services quarterly gross margin declined to 44.1% from 45.1%, primarily because G&K had lower margins and integration costs. First Aid and Safety Services quarterly gross margin improved to 46.9% from 44.8%.
- Cash flow and capital spending: Operating cash flow was $660.9 million; capital expenditures were $196.0 million. Investing cash flow included $127.8 million of proceeds from the sale of Discontinued Services.
- Liquidity: Cash and cash equivalents were $152.6 million and marketable securities were $33.7 million at February 28, 2018. The company had no borrowings under its $600 million revolving credit facility.
- Debt: Debt due within one year was $187.5 million and long-term debt was $2.535 billion, for total reported debt of approximately $2.722 billion. Commercial paper outstanding was $187.5 million at a weighted-average rate of 1.93%, with maturities under 30 days.
- Shareholder returns: Dividends declared were $1.62 per share, compared with $1.33 in the prior-year periods. The company repurchased $37.1 million of stock primarily for employee tax withholding; no purchases occurred under the authorized $500 million share-repurchase program.
Material changes versus the prior comparable period
- The G&K Services acquisition, completed March 21, 2017 for approximately $2.1 billion, materially increased revenue, goodwill, intangible amortization, operating expenses and debt.
- G&K transaction and integration expenses were $9.8 million in the quarter and $26.9 million year to date, compared with $9.3 million and $15.5 million in the respective prior-year periods.
- Selling and administrative expenses increased 36.8% in the quarter and 32.6% year to date. Drivers included G&K-related labor and amortization, investment in a new enterprise resource planning system, and an approximately $40 million one-time cash payment to employee-partners following tax reform.
- Net interest expense increased to $25.5 million in the quarter and $84.4 million year to date, primarily because of debt issued to finance G&K.
- The company sold Discontinued Services during fiscal 2018. The sale generated $127.8 million of proceeds and a $99.1 million pretax gain; discontinued operations contributed $61.8 million of net income year to date.
- The Tax Cuts and Jobs Act produced a provisional net tax benefit of $150.5 million, including a $163.8 million deferred-tax remeasurement benefit, $9.5 million of transition tax expense and $3.8 million of foreign withholding tax expense. This reduced the effective tax rate on continuing operations to negative 69.5% for the quarter and 0.9% year to date.
Outlook, risks, contingencies and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management expects the Tax Act to reduce effective tax rates in fiscal 2018 and future periods, but the reported tax effects remain provisional and may change during the measurement period.
- Management continues integrating G&K and acknowledges risks related to achieving expected synergies, integration timing, operating costs and future integration expenses.
- Forward-looking risks include labor, energy, fuel and medical costs; customer loss and outsourcing trends; competition; acquisition integration; SAP implementation; cybersecurity and systems disruptions; foreign exchange, tariffs and other political or regulatory factors; litigation; environmental matters; and changes in tax and labor laws.
- Cintas was in compliance with all debt covenants. Covenant breaches could accelerate debt maturities and impair liquidity.
- Ordinary-course litigation and claims include personal injury, customer contract, environmental and employment matters. Management does not expect these matters, individually or in aggregate, to have a material adverse effect, but the filing does not quantify potential exposure.
- The preliminary purchase-price allocation for G&K remained subject to completion at February 28, 2018. Goodwill was $2.820 billion and service contracts were $557.5 million.
- Disclosure controls and procedures were effective as of February 28, 2018, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether G&K integration produces the anticipated cost synergies and restores Uniform Rental and Facility Services margins.
- The final tax effects of the Tax Act, including deferred-tax remeasurement, transition tax and foreign withholding tax estimates.
- Debt reduction progress, commercial-paper refinancing needs and compliance with leverage and interest-coverage covenants.
- The final G&K purchase-price allocation and the resulting goodwill and intangible amortization.
- Future capital expenditures, cash generation and the timing of any share repurchases under the $500 million authorization.
- Potential additional proceeds from the Shred-it transaction, which remain an unrecognized gain contingency because of holdback uncertainty.
- Whether one-time employee payments, ERP investment, acquisition costs and other unusual items continue to affect operating margins.